Taxes When Renting Out Your U.S. Vacation Property
We decided not to go to our home in Arizona this past winter due to COVID, but we did rent it out over the winter to cover some of our costs. This is the first time we have rented out our winter home and were wondering what the tax consequences are?
Tax Reporting in the U.S.
While Canadian snowbirds are tax residents of Canada, they must report U.S. rental income to the Internal Revenue Service (“IRS”) if they rent their property out for 15 days or more per tax year. It should be reported on IRS Form 1040NR.
Unless you make a special election by filing IRS Form W-8ECI with your Form 1040NR, the IRS will levy withholding tax on your U.S. rental income. The withholding tax is 30% of the gross rental income.
Also, certain U.S. states require you to pay state-level tax on your rental income - you may be subject to both state and county and/or city level tax on your rental income.
It is always best to consult with tax professionals familiar with local law to ensure that you abide by all relevant legislation for your vacation rental.
Tax Reporting in Canada
U.S. source income must also be reported in Canada to the CRA. You will receive foreign tax credits from the CRA for the federal and state income tax that you pay in the United States. These foreign tax credits offset the tax owing in Canada, and if you receive sufficient foreign tax credits, you may be able to completely avoid double taxation.
Failing to report your rental income in both Canada and the U.S. can result in fines and hefty interest charges being added to any income tax that you should have previously paid.
You can learn more about taxes for Canadians when renting out your U.S. vacation home here.